Oct. 28, 2024 — CANADA’s p&c policyholder protection provider is seeking more financial data from its member insurers in an effort to become better prepared for major catastrophic losses.
The Property and Casualty Insurance Compensation Corp. said it found this summer when conducting a desktop insolvency simulation exercise that it has insufficient data on individual insurers’ reinsurance coverage.
PACICC partnered with the B.C. Financial Services Authority to better understand how the system would respond — or fail to respond — to a major earthquake followed months later by a severe aftershock.
In the simulation, both the initial event and aftershock caused significant insured losses that were far greater than those resulting from the 2016 wildfire in Fort McMurray, Alta., which remains Canada’s most expensive catastrophe for insurers.
PACICC CEO Alister Campbell said in the latest edition of the group’s Solvency Matters quarterly newsletter that in order to run the simulation exercise, it needed to analyze the impact of severe insured losses on the balance sheets of member insurers.
“We also needed to make general assumptions regarding the reinsurance protection purchased by each of our members to supplement their capital in worst-case scenarios,” he said.
PACICC consulted major reinsurance brokers and the federal regulator to determine the likely overall natural catastrophe reinsurance purchase made by Canadian insurers. Now estimated to be more than $36bn, the amount is roughly double the amount purchased 10 years ago.
“But then, we simply spread the estimated purchase across all members based on their property insurance market share,” Mr. Campbell said.
“Essentially, we had to guess how much was purchased by each individual member.
“The first lesson learned in our desktop exercise? Guessing isn’t good enough.”
He said the need to better understand the Canadian p&c industry’s potential resilience in the face of accelerating natural catastrophe losses is — in itself — already a compelling reason for ensuring that it can use something better than guesswork in its modelling.
“But Canada is a quake-exposed nation, and despite a decade of asking, we still have no government backstop mechanism in place for a worst-case scenario that we all know will happen someday.
“So, it becomes simply imperative that PACICC puts itself in a position to model its tipping point exposure more accurately.”
And Mr. Campbell said doing so will require access to member-specific reinsurance information.
“Over the next few weeks, we will be discussing this with our board and our members. And then, subject to their approval, we will be seeking regulatory blessing for a proposal to ensure that PACICC has access to the information which is essential for us to do our job.”
In the simulation exercise, a handful of regional insurers failed in the wake of the initial earthquake. And more insurers failed as a result of the aftershocks.
Mr. Campbell said that while the event itself was fictitious and the failed insurers were entirely fictional, it used an earthquake event series produced specifically for the exercise by seismologists at Natural Resources Canada, “which they had assured us was entirely scientifically credible.”
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